Bursting bubbles, China's way
2014-04-05 01:28阅读：
http://www.scmp.com/business/economy/article/1463048/letting-air-out-bubbles
Letting the air out of the bubbles,
Rather than bursting, mainland real estate and credit markets will
take decades to unwind;
Joe Zhang, South China Morning Post, 3 April 2014
Despite the familiar refrain from analysts these last few years,
China's real estate and credit bubbles have not burst.
While I, too, am worried, I have not been brave enough to venture a
prediction until now: I think the bubble will gradually deflate
over a decade or two, rather than burst dramatically.
I draw my inspiration from the Chinese stock market, which has been
deflating gently for 22 years and counting.
Since China's stock market was created in 1992, it has been a
bubble. Its price-earnings multiple has fallen from about 100 times
to about 20 times. Excluding the 16 banks that trade at
single-digit multiples, the ratio is still almost 30 times.
That deflation has destroyed trillion
s of yuan of valuation and hurt many millions of innocent savers
and gamblers alike. In these 22 years, China's money supply has
grown 43-fold, but the stock market is still gasping for air. It is
truly water torture.
China's stock investors often sell their investments in
well-performing stocks and funds while holding on to their losing
bets. For example, there are always massive redemptions once a fund
outperforms.
So instead of bailing out of a weakening real estate market,
they will most likely hold tightly on to their holdings of housing
units if the prices should weaken, provided that they have the
holding power.Peter Lynch, who used to manage money at
Fidelity, ridiculed this behaviour as 'pulling the flowers and
watering the weeds'. It is an irrational human behaviour globally,
but much more pronounced in China, where retail investors
dominate.
China's households are very under-geared. Credit card debt is a
tiny fraction of banking sector assets. Car loans are negligible.
Mortgage loans on housing have grown, but nothing like in the US or
Europe.
For most mortgages, property prices would have to fall by a third
or even half before hitting equity. Most mortgages older than a few
years have built a thick cushion on the back of regular repayments
and rising property prices.
Corporate leverage is high in China, but over half of the economy
is still in the hands of the state. The government runs a broadly
balanced budget.
The central government and the layers of local governments are one
and the same thing. Beijing not only dictates local governments'
taxes and expenditures but also sets the formula for sharing
revenues with them.
In many cases, the central government also issues bonds on behalf
of the local governments. This is sure proof that local governments
are simply subsidiaries of the centre. We are unlikely to see a
Chinese Detroit go bust while the central government stands idly
by.
In hindsight, the US crisis in 2008 was triggered by the 'free
market religion' long adhered to by the US government and the
Federal Reserve. If those institutions had poured enough money into
Lehman Brothers and other 'too big to fail' institutions when the
first signs of a panic emerged, a crisis would have been
avoided.
In China, there will be no congressional debates in the event of
such a challenge. They will just throw money at the problem. After
much politicking, the US government and the Fed did pretty much
what the Chinese government did straight away.
China doled out a four trillion yuan (HK$5 trillion) stimulus
package in late 2008 while US politicians were still locked in
debate. The Chinese are far more tolerant of the 'moral hazard' a
quick rescue may create.
Finally, it is important to consider some cultural and
institutional factors related to China's real estate market.
(1) Unlike in the US, Chinese citizens cannot declare bankruptcy or
walk away from their mortgages. Their liabilities will be with them
forever, until repaid.
(2) There is a stigma attached to housing defaults. In Hong Kong,
for example, while a person can declare bankruptcy, households
continued to service their mortgages long after the values of their
homes had fallen well below their mortgage liabilities after the
crisis in 1997.
So, what is going to happen to the millions of vacant flats and the
very high housing prices across China? The outcome is most likely a
gradual deflation, lasting many years or even decades. The
deflation will constitute destruction of household savings and
wealth, much like the protracted deflation of the country's stock
market.
But as the destruction will be spread out over many years, its drag
on the economy will be gradual rather than dramatic.
Joe Zhang is the author of Inside China's Shadow
Banking: The Next Subprime crisis?
